Trends in the Cost of Employer-Sponsored Coverage

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

M. Susan Marquis, Stephen H. Long

After years of double-digit premium increases in the late 1980s and early 1990s, the cost of employer-sponsored health insurance had moderated considerably by the mid-1990s. In 1997, premiums rose on average just 1.9 percent over the previous year, according to employers who participated in the Robert Wood Johnson Foundation (RWJF) Employer Health Insurance Survey. Other major employer surveys confirmed this pattern of restrained cost growth for both 1997 and 1998.

Geographic variation in cost increases was modest. Among the 12 randomly selected communities tracked in the Community Tracking Study, the spread was only 3.6 percentage points -- from a low of 0.2 percent in Orange County, California, to a high of 3.8 percent in Little Rock, Arkansas. Other communities fell within a narrow band: Cleveland and Miami at 1.1 percent, Boston at 1.6 percent, Phoenix at 1.8 percent, Lansing at 2.0 percent, Syracuse at 2.1 percent, Seattle at 2.4 percent, Indianapolis at 2.6 percent, Newark at 3.0 percent, and Greenville at 3.3 percent. None of the individual site changes differed significantly from the national mean.

Wide Variation Among Individual Employers

Despite the low average increase and limited geographic variation, individual employers experienced markedly different cost trajectories. Thirty-seven percent of employers that offered health insurance reported zero change in their 1997 premiums compared with the prior year. But a notable 19 percent reported cost increases exceeding 10 percent, and 7 percent actually saw their coverage costs drop by more than 10 percent.

Firm size played a major role in the degree of premium volatility. Among small establishments with fewer than 10 employees, 34 percent reported premium swings greater than 10 percent in either direction -- 26 percent experiencing increases and 8 percent experiencing decreases of that size. For employers with 100 or more employees, reports of changes exceeding 10 percent were roughly half as frequent, at about 19 percent. This disparity reflected the fundamentally different risk pools and pricing mechanisms that small and large employers face in the insurance market.

Cost Issues to Consider

How much of the moderate cost growth documented in the survey reflected deliberate employer efforts to contain spending -- versus other factors -- required further study. The reported premium changes did not account for variables that could be masking underlying cost pressures, such as changes in benefit design, shifts in the types of plans offered by employers, and changes in the types of plans employees selected. If employers were holding premiums down by cutting benefits, increasing cost-sharing, or steering workers into more restrictive plan designs, the modest premium growth might be painting an incomplete picture.

More importantly, the modest national average concealed substantial cost increases hitting some individual employers, particularly small firms. If these spikes led employers to drop coverage entirely or to shift a larger share of costs onto workers, employees at these firms could find themselves with reduced access to health insurance. The data highlighted a tension between the reassuring national trend and the far less stable reality at the individual employer level.

For workers at small firms, the combination of high premium volatility and the relatively thin financial margins of their employers created a precarious situation. A single bad year of claims could produce a double-digit rate increase that pushed a small employer out of the insurance market altogether. Unlike large employers, which benefit from larger, more predictable risk pools and greater bargaining power with insurers, small businesses had limited tools to manage these cost swings.

The era of moderate premium growth also raised questions about sustainability. Many observers at the time attributed the slowdown in cost increases to the expansion of managed care, which had gained market share through the 1990s. Whether managed care could continue holding costs in check as the tools and restrictions that produced savings faced growing resistance from consumers and providers was an open question. If cost growth accelerated, the already-fragile position of small employers and their workers would come under even greater pressure.

Data and Methodology

This Data Bulletin presented results from the 1997 Robert Wood Johnson Foundation Employer Health Insurance Survey, a nationally representative telephone survey of private and public employers. The findings were based on responses from 21,543 private establishments. The survey was a component of Health System Change's Community Tracking Study, conducted by Research Triangle Institute (RTI) and designed by RAND and RTI with HSC's collaboration. Premium increases reported in the survey were weighted by employer size.

Sources and Further Reading

1997 Robert Wood Johnson Foundation Employer Health Insurance Survey, conducted by Research Triangle Institute.

Related HSC publications: "Tracking Health Care Costs," Issue Brief No. 23, November 1999; "Despite Fears, Costs Rise Only Modestly in 1998," Data Bulletin No. 13; "Trends in Offering Employer-Sponsored Coverage," Data Bulletin No. 15.